Market Correction Coming Soon?
Do you ever get that feeling that when things look too good to be true, you’re not far from finding the truth? And one truth is that the stock market is not driven by valuations or earnings, but instead by the emotions of institutional and retail investors — animal spirits.
Right now, stock prices are at their 2nd-highest of all time. While the US economy does look good, there remains a lot of friction, and US interest rates are stuck at the world’s highest level. Currently, the Dems are pushing the Supreme Court to block and cancel Trump’s tariffs. If the SC succeeds in stopping US tariffs, the outcome would have to be negative. The US would face a wave of imports that would crash the US economy, and the US would have minimal exports. Trump would have to refund tariffs collected, then to execute massive government spending cuts and abandon big projects. It all points to disaster for the economy and the stock market.
Yet, nature must balance itself, and after the 3-month rally party, will investors harvest their bull market profits? Will profit-taking be what cues this potential correction or something else? You might still have a buy the dip opportunity in the next few months. Just a point though, is that the 6 month and 5 year projections for the US are positive. But that won’t matter to those who fear slides.
US GDP, jobs, consumer spending and more have been strong, but the US tariff pause has ended and countries face big surcharges that will reduce trade quickly. President Trump is announcing new tariffs daily, such as 30% on the EU and Mexico and on Canada too. Big trading partners thus a big shock to supply chains. That has to mean higher consumer and producer prices. We’ll see the actual numbers in August.
What Do the Experts Say?
Morgan Stanley’s Chief, Jamie Dimon, a significant voice on the state of the market said “Significant risks persist – including from tariffs and trade uncertainty, worsening geopolitical conditions, high fiscal deficits and elevated asset prices.”
Yet, another analyst, speaking on CNBC believes April’s correction won’t be repeated because investors won’t be tricked again. It seems they’ve learned from the last run up. They believe the tariffs will never be imposed. The tariff pause date has come and gone with no drop in stock prices. Is he right?
Euphoria vs The President
Trump’s not done and the trade deficit is rising again ($71 billion in May) after a one month reprieve. That won’t sit well with the President.
And the uncertainty, economic pain, and supply chain issues in tariffs could wreak havoc with the world’s markets. So far, it’s mostly been talk and the tariff revenues have been minimal. But now, with Trump’s tariff pause ending, American companies are bound to be hit hard themselves and consumers will face the real price reality. Consumers are highly affected by Democrat media negatively charged reports and they could begin seriously cutting back, or their usual products might not be available.
So far, China has itself not reacted, but the heat of summer might bring real retaliation from them. Stock valuations are at their highest (except the post-covid rally), so in investor’s eyes, isn’t this where things go sour? China, Russia, Iran, Canada, Europe, Brazil and more. Too much on his plate, and will we see a spill?
Liberation Day Tariffs Revisited
If the April 2nd tariff announcement hit the markets that hard, why would the actual application of those tariffs not do the same? Is it only because investors don’t believe President Trump will follow through? What if he does this time? How far can this tariff drama go on?
The New York Times, a foe of Trump, called him TACO Trump (Trump always chickens out) because of so many flip-flops on his tariffs. He seemingly uses these threats to force countries into awareness, and to affect fair deals, but sometimes it doesn’t seem like he wants a deal. The US is collecting massive tariff revenues thus far. The tariff resumption would put those revenues into overdrive, and despite expert claims that tariffs don’t cause inflation, consumers are likely looking at price hikes.
The new 50% tariffs on Brazil will reduce the supply of coffee (Brazil is a key supplier) and other countries will have to fill in the deficit. But can they? Coffee prices affect donut shops and restaurants alike. Other countries might see their coffee supply increase with lower prices as a result.
Will the Bull Rally Continue?e
It’s been quite a bull rally since President Trump announced the pause in the global tariffs, after the plunge from the announcement of those tariffs on April 2nd, his liberation day.
You might say it’s been a period of euphoria, which typically precedes a market plunge. While President Trump’s plan to rejuvenate the US and grow its GDP is valid and impressive, there’s going to be some potholes on that highway. We’re on a big uptrend currently, but there’s no strong reason to believe H2 2025 is going to feature booming corporate profits.
The high prices for Bitcoin, real estate, tech stocks, AI stocks, tech stocks, are suspicious, because the road ahead isn’t that clear. It’s a speculative stock market driven by the promise of AI, directed at FOMO retail investors. With reports of consumer spending and real estate collapses, without interest rate relief, they may panic.
The biggest issue is the number of irons in the fire Trump is holding, while domestic conflicts, legal conflicts, trade conflicts, and military conflicts rage on a daily basis. He’s sparring with Putin while trying to keep Iran under control and is in conflict with Japan. Keeping all of that under control is tough, and when he restarts the threatened tariffs and few countries making deals, we’re going to see crises. And tech and AI won’t solve them.
As President Trump ends the tariff pause and announces new tariffs on a number of nations, it’s pushing many of them into a corner. Today, an EU official said that due to the broad 30% tariff on their exports to the US/Europe trade would likely come to a standstill as the EU could not manage a fair trade deal with such high rates. Canada is looking into the abyss with its 30% tariff hike.
But why a Correction Soon?
- we’ve had a 25% growth spurt, and it can’t continue at that rate
- market is driven by speculation and animal spirits
- If tariffs are actually enforced at the new predicted level, it would send a shockwave into all economies
- stocks are grossly overvalued, particularly mega-cap tech stocks
- forward earnings ratios are at 22, well up from the traditional 17
- the FED says inflation will hit this summer (Yet June’s inflation stayed steady at 2.7%, up only .3% year over year
- The AI boom was the catalyst, but a consumer loss of confidence would send it crashing again
- Q2 corporate earnings were strong, but that’s old news now
- Markets have achieved and exceeded their early record highs
- Volatility is high characterizing investor uncertainty
- Questions about whether US consumers can fund corporate revenues at current levels
- Product supply is dwindling after the pre-tariff import spree
- Imports will need to grow, which will push consumer prices up
- With rising prices, the FED might raise rates
- Are overextended investment managers reaching their risk limits and want out?
If you were a major hedge fund manager or insurance company, when would bail on the rally? Is there a point in the curve where you couldn’t handle your nervousness? When does the investor Greed meter flip to fear?
Who knows what Trump will do? However, his pride might make him enforce the tariffs, especially if countries can’t make the right deals. Facing this threat, a slowing economy, and with stocks at their record peak, investment managers with everything to lose are sweating harder in the summer heat.
See more on the best AI stocks to buy and in particular, what might be the best AI small caps to buy. See the stock market forecast report for more context on investing.
Title image courtesy of CNN
